No Winners In Ugly Greek Debt Deal, Only Lessons

Technocrats in Athens, Berlin and Washington Friday are no doubt congratulating each other for designing a bond swap that slashed more than EUR100 billion off Greece’s debt mountain.

But let’s not kid ourselves: the two-year story behind this debt restructuring is an ugly one of politicking and wasted time. There are no winners here, and there are already more losers arising from its far-reaching ramifications.

There are, however, lessons to be learned from this unseemly string of events. The most important is that our financial system is still trapped by the dilemma posed by Too-Big-to-Fail banks–four years since the U.S. mortgage crisis. Financial sector lobbyists who argue that now is not the time to fix that dysfunctional system should have a thorough reading of the Greece story.

Officials will crow that a higher-than-expected 83% of Greece’s old bonds was “voluntarily” tendered into this debt swap and so claim justification for triggering the collective action clauses that will force the remaining holders of Greek law securities into the exchange. But without those CACs hanging like Damocles’ Sword over them, and without the pressure that governments and national central banks brought to bear on banks and pension funds from Greece, Germany and France, would so many have willingly accepted a 73%-plus writeoff? As Commerzbank CEO Martin Blessing recently put it, this deal was as “voluntary as a confession during the Spanish Inquisition.”

Truth be told, Greece can rightly argue it had no choice but to use coercion. Any less than 95% participation and the European Union would not have approved the latest EUR130 billion bailout, leaving the country unable to pay its bills and thrust into a more damaging, disorderly default.

The German and French governments can in turn argue that they could not ask their taxpayers to back another Greek loan package without private sector creditors sharing the pain.

But this misses the point. What we really have is a systemic problem, one that needs to be addressed by measures that rein in the world’s powerful financial institutions and undo the excesses caused by the overly generous policies of the past.

The excessive lending to Greece and other peripheral euro-zone countries during the boom years was encouraged by the zero-weighting afforded to sovereign bonds under capital adequacy rules for banks. Despite sweeping regulatory reforms since the 2008 crisis, this patently flawed idea that government borrowers have no risk is still more or less in place.

After Greece’s problems exposed the folly of that policy, governments found themselves trapped by the biggest problem of all: the Too Big to Fail dilemma. As in 2008, the fear that a failed bank might prompt a systemic meltdown left European policymakers terrified of letting market forces play out. It’s why the EU delayed the inevitable debt write-down and instead forced Greece into a death spiral of austerity that killed its economy and swelled its debt load to an unsustainable 160% of GDP.

For months we heard of the risk imbedded in Greek credit default swaps and the unknown quantity of banks’ exposure to them. The fear was that payments on these poorly regulated derivatives would send a new round of cascading defaults through the world’s fragile financial institutions. And yet here we are Friday with the International Swaps and Derivatives Association declaring that Greece’s use of the CACs constitutes a CDS-tiggering “credit event” and all is calm.

It’s not that CDS never posed a risk, or that investors would never cover their Greek losses by selling bonds from other contagion-prone nations such as Portugal, Ireland and Spain. It’s that the European Central Bank has bought time by providing banks with more than EUR1 trillion in cheap three-year loans through two long-term refinancing operations. With that temporary liquidity buffer in place, Greece’s restructuring could safely proceed.

But neither the LTROs nor the Greek swap fix the problem. Yields are rising on Portuguese debt because many believe that Greece’s draconian approach will be a template for the next domino country.

In fact, markets will continue to demand painfully high compensation from the euro-zones’ debt-laden peripheral countries until the financial system itself is properly restructured. Until there is a true reconciling of banks’ balance sheets and they are forced to either raise much more capital, merge with their peers, or go out of business, nervous governments and investors will continue to take short-term, self-preserving actions that put long-term stress on the global economy and keep the threat of crisis alive.

Comments (2 of 2)

(Whithout ever having boroughed almost anything personaly) ,what is more ethically correct than the risk(=profit) takers of overlending pay occasionaly for overgambling ! Of course together with the crooks/politicians

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